8044 Montgomery Road Suite 163 Cincinnati, OH 45236
The Oxford Oracle
2021 Market Review
I hope this letter finds you and your family healthy and happy as we begin the new year.
Each year I write a letter outlining the principles that guide our investment decisions at Oxford, and share some perspective on the coming year.
Part 1: General Investing Principles
You and I are long-term, goal-focused, plan-driven equity investors. We believe that the key to lifetime success in equity investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure proceed inevitably from reacting to (let alone trying to anticipate) current economic/market events.
We're convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically always temporary declines.
Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at least twice that. And on two occasions (in 2000-02 and 2007-09), the Index has actually halved. Yet the S&P 500 came into 1980 at 106, and went out of 2021 at 4,766; over those 42 years, its average annual compound rate of total return (that is, with dividends reinvested) was more than 12%.
These data underscore my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines. We believe that portfolios should be built in anticipation of volatility, rather than in reaction to it.
The general principles above are all delivered via a proprietary investing system called Power of 5 Investing®. This system has served our clients well for 25+ years and will continue to guide how we serve clients well into the future.
Part 2: Current Observations
2021 can’t be viewed in isolation. 2021 was the second act of a drama that began early in 2020, kicked off by the greatest global public health crisis in a hundred years.
The world elected to respond to the onset of the pandemic essentially by shutting down the global economy—placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days.
Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent. This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no true precedent. This renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. I infer from this that if there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it.
If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are winning, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022.
In general, I think it most likely that in the coming year (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, with some resultant increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other unforeseen calamity—which we can never really do—equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they've been soaring since the market trough of March 2020.
Please don't mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I'm fully prepared to be wrong on any or all of the above points; if and when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we've made for each client, and not at all by current events.
With that out of the way, allow me to offer a more personal observation. These have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic's second major wave, and most recently a 40-year inflation spike. You might not be human if you haven't experienced serious volatility fatigue at some point. I know I have.
But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the equity market during either crisis—or, heaven forbid, both—his/her investment results seem unlikely ever to have recovered. If on the other hand he/she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. It was ever thus. I expect it always will be.
As we say in Power of 5 Investing, “It’s never different this time”. Markets rise and fall, but eventually continue their inexorable long-term climb upwards. We have been through bear markets before, and we will persevere and prosper when the next one hits. Dear clients, please be invited, and indeed encouraged, to raise with us any questions prompted by this very brief summary. That's what we’re here for.On behalf of the entire Oxford Financial Partners team, I wish you a happy, healthy and prosperous 2022!
Sources: Standard & Poor's; Yahoo Finance; J.P. Morgan Asset Management “Guide to the Markets” (p. 16); S&P 500 Return Calculator with Dividend Reinvestment, DQYDJ.com.